Educational Articles

Stock Screen: Conservative Stocks With High Yields - March 12, 2014

Alan House
| March 12, 2014

Value Line offers a number of proprietary measures to help investors identify so-called conservative stocks, the most notable being the Safety Rank. This measure is computed by averaging a stock’s Price Stability score and the company’s Financial Strength Rating. Safety Ranks range from 1 (Highest) to 5 (Lowest) and are distributed roughly in a bell curve, with the greatest number of stocks scoring 3 (Average) and the smallest number at the extremes (i.e. 1 and 5). Thus, selecting stocks that hold the best possible scores (i.e., 1 or 2) would help investors to avoid riskier fare.

Value Line provides screens each week, published in the Index section of The Value Line Investment Survey, that cull out stocks earning the highest Safety Rank and the second-best Safety Rank (presented as two separate screens). This alleviates the need to rummage through on a stock-by-stock basis, trying to find the most conservative fare. We also added a few other parameters such as a dividend yield above 3.8% and a market cap above $20 billion to ensure only well established companies made the cut. A couple of interesting stocks that made the list (see below) include Kinder Morgan Inc. (KMI) and AT&T Inc. (T - Free AT&T Stock Report).

Kinder Morgan Inc.

Kinder Morgan owns the general partner and limited partnership interests in both Kinder Morgan Energy Partners, L.P. (KMP) and El Paso Pipeline Partners, L.P. (EPB). With more than 80,000 miles of pipelines and 180 terminals, it’s the largest domestic transporter of petroleum products, natural gas, and carbon dioxide. Kinder also owns the only pipeline that serves the West Coast of Canada.

Kinder reported solid results to finish last year. Fourth-quarter revenue growth was aided by enhanced performance at Kinder Morgan Energy Partners, and a full year of contributions from El Paso Pipeline Partners. EPS came in at $0.33, helped by higher contributions. Kinder should advance even further in the year recently begun, as it plans to reduce its 50% interest in its Ruby Pipeline, and Gulf LNG to El Paso. The company has nearly $15 billion in large-scale endeavors that should come to fruition over the long pull. These projects should help boost the top line, which we believe will increase sharply this year.

We look for Kinder Morgan’s dividend to be increased again this year. The board of directors has raised the quarterly dividend rather frequently, and expects that it will declare dividend payments of $1.72 per share for 2014. At this juncture, it appears that the increase in the payout will be well covered by cash flow from operations.

Kinder shares are worthy of consideration by conservative accounts seeking income. The dividend yield is well above the Value Line median and we look for high single-digit increases in the distribution over the 3- to 5-years ahead. Furthermore, the stock carries an Above Average Safety score of 2 and Stock Price Stability is strong at 85 out of 100.

AT&T Inc.

AT&T Inc., formerly SBC Communications Inc., is one of the world’s largest telecom holding companies and is the largest in the United States. Its traditional (SBC only) wireline subsidiaries provide services in 13 states, including California, Texas, Illinois, Michigan, Ohio, Missouri, Connecticut, Indiana, Wisconsin, Oklahoma, Kansas, Arkansas, and Nevada. It also owns AT&T Wireless and bought PacTel, SNET, Ameritech, AT&T Corp., and BellSouth. The Company's businesses consist of Voice, Data, Directory Advertising, and Wireless, with the latter contributing a majority (56%) of the top line.

Underlying fundamentals at AT&T remain solid. Competitive pressures from Verizon (VZ - Free Verizon Stock Report), heavy investment spending on the multi-year Project Velocity IP plan (it primarily intends to expand the carrier’s 4G LTE network), and lingering weakness in the enterprise market might well hinder profits over the next several months. But, the Wireless segment should continue to climb at an aggressive clip, as the company boosts its LTE capacity, endeavors to improve smartphone positioning, and works to attract more value-oriented consumers. What’s more, increased penetration of U-verse is already generating approximately $12 billion in revenues each year. A gradually improving domestic economy should also lend a helping hand to the company’s enterprise segment, which supplies services to medium to large companies.

The wildcard at AT&T remains Wireless margins. They’ve been a bit on the soft side of late, largely due to higher smartphone subsidies, largely iPhone, and intense competition with rival Verizon. A rebound may be in the cards, however, as average revenue per year grows along with the transition to LTE, and as AT&T better leverages its recent mobile investments, including its new “Next” program, which allows customers to upgrade to a new smartphone each year in exchange for a small monthly fee.

This Dow member is a solid choice for risk-averse investors seeking current income. The current yield is north of 5%, which compares very favorably to the average stock under our review. We look for further increases in the payout down the road, given our favorable earnings-growth projections 3- to 5-years hence. What’s more, AT&T is top notch (Financial Strength rating A++), and its stock earns our Highest (1) Safety score.